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Finance Finance News The case against fast-tracking income tax cuts Updated:

The case against fast-tracking income tax cuts

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Workers may have welcomed reports this week of earlier-than-expected income tax cuts, but economists warn they would worsen inequality and do little to boost the economy.

Treasurer Josh Frydenberg revealed on Wednesday that the federal government was considering fast-tracking legislated tax cuts as part of its plan to help the economy recover from COVID-19.

The Treasurer said the cuts, which will eventually introduce a top marginal tax rate of 30 cents in the dollar for anyone earning between $45,000 and $200,000 a year, would speed up the economic recovery by putting “more money into people’s pockets”.

But leading economists told The New Daily the cuts would do little to help, as workers will lack the means and confidence to spend them.

University of Queensland economics professor John Quiggin said bringing forward the legislated cuts “was a very bad idea” based on a misdiagnosis of the problems facing the economy.

“Our problem isn’t really a demand problem; it’s an income support problem,” Professor Quiggin said.

It’s not that there isn’t enough demand out there for restaurant meals, visits to pubs, holidays and all those sorts of things – it’s that we’re limited in what we can do.

“And so, for me, the strategy should be supporting people’s incomes rather than putting money into the pockets of people who already have plenty.”

Professor Quiggin said governments should abandon the tax cuts and instead focus on supporting the incomes of people who have lost their jobs or had their hours cut as a result of the pandemic.

This means extending JobKeeper and the doubled JobSeeker payment beyond their scheduled end dates in September, he said.

Prime Minister Scott Morrison celebrates after the tax cuts were passed in July 2019. Photo: Getty

“You may have to find some way of modifying them, but to the extent that we’re short of money, that’s what we need to be looking at,” Professor Quiggin said.

Given many workers are worried about their jobs and incomes during the pandemic, Grattan Institute CEO Danielle Wood said other support measures would stimulate the economy more effectively.

This is because nervous households are more likely to save the tax cuts than spend them.

“Things like infrastructure spending tend to give you the highest economic kicker, particularly if it’s the sort of infrastructure you can ramp up quickly – so, short-term maintenance projects or things like social housing,” Ms Wood said.

“Government spending on services also has a pretty good return.”

Ms Wood said spending on mental health services and tutoring for disadvantaged students were particularly good ideas, as both were labour intensive and met important social needs.

jobkeeper review june
Treasurer Josh Frydenberg will deliver an economic update on July 23. Photo: Getty

The Grattan Institute argued in a recent report that governments would need to spend $70 to $90 billion over the next two years to drive down unemployment to pre-crisis levels by mid-2022.

And Centre for Future Work senior economist Alison Pennington said none of that should be spent on income tax cuts.

Ms Pennington told The New Daily that consumers would lack the income and confidence to spend the extra money – noting that tax cuts are “serving as a political distraction from the ambitious, large-scale, sustained public investment required to reconstruct the economy and get people back into jobs”.

“It has been wrongly claimed that cutting personal income taxes will fuel demand and entice businesses to invest in this climate, and motor new economic activity,” Ms Pennington told The New Daily.

“This is a gross underestimation of the scale of private-sector shock we’ve already experienced.

Business and consumer confidence is shattered, private incomes and revenues have collapsed, supply chains need rebuilding, and reinfection risk will create profound uncertainty for years to come.”

Ms Pennington said extending JobSeeker and JobKeeper would a better idea, as the money would flow to lower-income earners who are more likely to spend the extra cash, whereas the legislated tax cuts, in their current form, would provide greater benefit to higher-income earners who are more likely to save the cash.

Recent data from credit bureau illion and economic consultants AlphaBeta appears to support this point – with lower-income earners who received stimulus payments increasing their spending by 10 per cent above pre-crisis levels during the lockdown, and higher-income earners slashing their spending by more than a third (36 per cent).

But that’s not to say all economists are against tax cuts.

Many believe they would encourage consumers to hit the shops.

University of New South Wales economics professor Richard Holden, for example, said immediately bringing forward the third stage of tax cuts would “definitely” help the recovery “by boosting the spending power of lower- and middle-income earners”.

And he said record-low interest rates mean the government can afford to splash out on other policies.

“I advocate both tax cuts and expanding JobKeeper, keeping free child care, not reducing JobSeeker to its previous level, and other spending measures,” Dr Holden said.

“It is simply incorrect to suggest that with such low government debt-to-GDP and low interest rates that we somehow need to choose between tax cuts and spending.”